The year 1979 was one of grievous setbacks for the future security of the oil supply of the Western world, its economic and financial prospects, its strategic capabilities, and its political stability.

To begin with, we were completely unprepared for the collapse of the Shah's regime in Iran, even though there were many early warning signals. And our government and business community share a substantial measure of responsibility for shortsighted policies which contributed to the destabilization of the Shah's regime.

What followed in terms of oil alone should now be a familiar story. During the course of 1979, the decline in Iranian oil production was more than made up by other producing countries. And taking account of a virtually unchanged world oil demand, importing countries were able to increase their oil stocks during the year by well over one million barrels a day, more than has been achieved during recent periods. Nevertheless, a temporary decline in world oil production led to apprehensions by importing countries and their oil companies that they might be unable to cover their future needs. Accordingly, importers tried to obtain added supplies and to increase stocks at almost any cost. This, in turn, resulted in panic buying at largely uncontrolled and escalating spot oil prices.

Obviously, the Organization of Petroleum Exporting Countries (OPEC) would not maintain its official quotations at a lower level if an increasing proportion of its oil was purchased on the spot market by importing countries or companies at much higher prices. In due course, OPEC increased its official prices to more than double their previous levels. Also, OPEC countries would naturally try to sell more and more of their oil directly or through intermediaries at the higher spot prices. This would mean that the established customers for OPEC oil could only obtain smaller quantities of the oil they had previously been able to acquire directly from the producing countries. Accordingly, more and more companies and countries were unable to purchase oil from their former regular major oil company suppliers; instead, they were forced to turn to producing countries or trading companies to assure themselves of supplies, and they showed themselves willing to pay them practically any price that they asked for.

As early as February 1979 it was painfully clear that this state of affairs posed a massive danger for the world oil economy and that it required coordination and cooperation among importing countries and among their companies if this buying panic were to be stopped. As a minimum, the major importing countries would have had to establish a firm policy for themselves and their companies not to buy oil at above OPEC price levels; at the same time they had to be willing to establish an international and national allocation system that would assure all countries and companies an equitable share in the oil that was available at OPEC prices. Without such arrangements, higher spot prices would sooner or later be incorporated into higher official OPEC prices. This would be especially damaging because OPEC prices are not freely fluctuating market prices. Once raised, they are unlikely to come down again, because any future softness in prices would be countered by a cutback of OPEC production.

The governments of the major importing countries were, of course, aware of this problem. But either they did not really comprehend its importance or they lacked the will and leadership qualities to act. The relevant international institutions, such as the Organization for Economic Cooperation and Development (OECD) or the International Energy Agency (IEA) either felt that they did not have the constitutional power to deal with this issue, or that they would not have the support of their member governments. Industry generally opposed any course that might involve national or international official controls or interference.

While it is, of course, not certain whether any national or international arrangements, had they been made, would have succeeded, in actual fact nothing was even attempted to stem the tide of upward-spiralling prices. It would appear that most of the wounds of 1979 have been self-inflicted.

So we lived through 1979 with Iran in disarray, with the oil economy in turmoil (even though there was no overall sustained shortage), and with the Soviets invading Afghanistan. It was indeed a year illustrating the impotence of Western power and the failure of national and international leadership.

II

While 1979 has passed, the problems it created or aggravated are going to stay with us, probably for the indefinite future. Let us first review the medium term to 1985.

With a recession accompanied by a substantial retardation in world economic growth, and with continued conservation and sustained development of energy from all available non-OPEC sources including coal and nuclear energy, it now appears that world energy requirements could be met if OPEC production, after a decline during 1980 (as compared with 1979), would then increase again and reach about the 1979 level by 1985. This would require, in effect, that political and economic conditions in the major oil-producing areas, notably the Persian Gulf, be such as to lead to sustained and increased production to such levels. It would also require the adherence by the Western nations grouped in IEA to the oil import limitation targets for 1985 and intervening years, which in turn would require greatly increased conservation and further development of indigenous energy sources.

But this is only the statistical supply and demand part of the story, and even this much depends on the doubtful and difficult conditions just stated. Moreover, even under these conditions, the financial problems of recycling petrodollars and particularly meeting the needs of the less developed countries (LDCs) are sure to take on a much more serious dimension than in the 1974-78 period. This is a conclusion universally shared today by those in positions of public or private responsibility, including members of the banking community who assessed the situation in the earlier period and believed that the private banking community could to a very great extent handle the problem. Today, however, there is solid agreement that the omens are far darker.

Specifically, at current OPEC prices and assuming future increases at even somewhat less than the anticipated rate of inflation (the most favorable possible assumption), OPEC countries might accumulate a surplus of about $115 billion during 1980 and of some $350 to $450 billion between 1980 and 1985. This would imply that the importing countries would suffer a corresponding balance-of-payments deficit during this period, which would have to be financed somehow by the recycling of the petrodollar surplus.

For the year 1980, the deficit of developed countries has been estimated at about $50 billion and that of less developed countries at nearly $70 billion. The foreign debt of LDCs might reach about $440 billion in 1981, compared with about $385 billion in 1980 and $150 billion in 1975. And with petrodollar surpluses continuing to accumulate, the financial and balance-of-payments position of oil-importing countries would deteriorate at an accelerating rate. It is most unlikely that our national and international financial system can cope with this problem without risking sustained recessions, a slow rate-if any-of economic growth, high rates of inflation, widespread unemployment, industrial and national bankruptcies, and political upheaval.

The debt problem could, of course, be solved if the values of the currencies in which the debts are incurred decline in their purchasing power to such an extent that the repayment of debts, when due, can be done at a fraction of their original value. All of this did in fact occur between 1974 and 1978, a period which has been portrayed by some as the "golden age" of petrodollar recycling.

But it seems now that the jig is up. The recycling "success" in the past was predicated on some confidence in the value of the currencies involved, on the willingness of oil-producing countries to spend ever-increasing amounts of petrodollars for national development and military purchases, and on their readiness to suffer substantial declines in the real price of oil and to accept between 1974 and 1978 the virtual disappearance of their annual petrodollar surplus.

Now the producing countries are trying to establish a policy under which oil prices will not only go up regularly in step with the rate of inflation, but also will increase on a regular basis at rates exceeding the rate of inflation by an additional amount depending on the increase in the Gross National Product (GNP) of the OECD. In short, they are seeking a regular advance in the real price of their oil. Many of them have also cut back their earlier economic development programs so that the former wild increases in annual import expenditures have recently been coming down substantially.

Furthermore, the producers are now placing even greater emphasis on increasing the value of their oil exports by adding refining, petrochemical and transport operations to their national programs. This would of course further add to the foreign-exchange burden of oil purchased by the importing countries and would thus increase the petrodollar surplus even more.

More important, perhaps, the question arises whether the producing countries would really be prepared to continue to produce oil at a rate that would continuously generate surplus petrodollars for them. As they are well aware, they would in effect be exchanging oil in the ground, whose value will certainly advance at least with inflation, for monetary assets whose value would tend to decline with inflation.

If, alternatively, they were to reduce their production, they would not only stretch the life of their oil reserves, but as real prices in tight oil markets are likely to increase, their revenues would go up. It is true that the world economy would suffer very badly by any resulting oil shortage, but the producing countries might argue that, at least to some extent, their loss from the world's depressed economic activity would be less than the erosion in the value of their surplus financial assets that they would suffer through inflation.

The minimum protection the producing countries could be expected to demand, if they were to continue to produce oil at levels needed by the importing countries, would be an indexation of their petrodollar accumulations in line with inflation. To take care of this problem, I have recently suggested that this might be done by making available to them inflation-indexed energy bonds that would be issued by an international agency. As any additional cost that could result from such indexation would have to be underwritten by the oil-importing countries, the financial burden on the latter might, obviously, increase.

III

Let us now turn to some of the other major problems that affect the security and availability of oil supplies.

The producing countries, having taken full control over their national oil operations, in fact do not recognize as binding supply or price arrangements even if freely concluded by them. Recently they have gone so far as to change agreed-upon prices retroactively. This, they argue, they are entitled to do under the doctrine of sovereign control by producing countries over their natural resources. Because the contracting party in the producing country is also a government-owned oil company, they contend that any change the government requests in the terms and conditions affecting crude oil production and sales would in fact constitute a sovereign act, so that the government oil company that had entered into a contract would be entitled to claim force majeure vis-à-vis its customers.

But, undoubtedly, the increasing unilateral application of this doctrine is also related to the ease with which the host countries have been able to apply it, and to the lack of opposition by the affected private or public interested parties against unilateral expropriation or the cancellation of legal and contractual rights. Because of the fear of being arbitrarily cut off from supplies, Western nations and their companies now accept within a wide range practically any economic or political terms that a producing country may impose on them. This subservience, however, rather than safeguarding the remaining rights and position of the companies, in fact encourages the host countries to continue to proceed as they see fit. We have thus entered a period in international oil of near "lawlessness" in the relationship between producing countries, the oil companies and the importing countries.

The issues are not only supply and price stability. They also include exploration and development efforts that are now exclusively dependent on policies of producing countries, which obviously are not interested in creating any surplus of supplies that might endanger OPEC prices.

Moreover, especially since 1979, producing countries have cut back the oil they supply to the major international oil companies, frequently below the level of their direct requirements. The "Internationals," therefore, can no longer provide oil supplies to third parties as in the past. More and more of the oil is sold directly (or sometimes through trading companies) by producing to importing countries. As a matter of fact, the share of the Internationals in world oil trade has declined from 78 percent in 1974 to about 44 percent in 1979, and is declining even further.

At the same time, the terms imposed by producing countries for oil supplies include more and more political and other extraneous conditions, related, for instance, to the interest of the producing countries in the Palestinian problem, or in their nuclear capabilities or in the political postures of their government customers.

Thus, oil companies no longer perform an effective independent role as a buffer in the relationship between oil-producing and oil-importing countries. They have practically no bargaining leverage with regard to any decisions affecting their operations in producing countries. Moreover, any action by OPEC on supplies or prices that would lead to a higher cost of its oil would, as OPEC is fully aware, also tend to benefit the oil companies, as their own non-OPEC production would also become more valuable.

This is at best a messy situation all around, where the producing countries can have it nearly all their way, because there are no countervailing powers they have to consider. The only question they face is whether, because of their own interest in the economic and political well-being of their customers, it would be prudent for them to exercise self-restraint.

This interdependence is indeed a very weak reed to lean on. It is unlikely to become a controlling factor in the decision-making process of OPEC countries as long as the various importing countries and their oil companies, in the spirit of sauve qui peut, are willing to go to practically any length in order to secure their individual oil supplies.

IV

Ideally, one might perhaps have hoped that the major importing countries would have formulated an effective energy policy, and also established a coordinated approach to OPEC with regard to supply and financial problems caused by its actions. Instead, what has dominated international oil relations has been the fear of importing countries and their companies that OPEC may cut off their supplies, or impose even stiffer conditions at the slightest sign of resistance or of a common policy approach by the importing countries. The latter have acted as if they were in such a weak position that in order to obtain continued supplies they must act separately and try to gain favors by ingratiating themselves with OPEC countries by any means feasible.

This policy has been a failure. And the experience of 1979, previously described, has demonstrated how ineffectiveness resulting from fear and lack of common purpose has badly hurt the West, and in fact accelerated the disintegration and Balkanization of the world oil economy. Now again individual importing countries move in various directions, each one suspicious of the other, while pretending on the surface some desire for a unified approach.

The International Energy Agency (IEA), which was specifically established to deal with emergency supply situations, operates under terms of reference which do not allow it to deal with the actual situations as posed now or for that matter in 1979. And when its terms of reference did in fact permit it to intervene, the Agency apparently tried its utmost to avoid any actions, perhaps out of fear that OPEC might not like it.

Without going into details, it would appear that in order to cope with current problems where oil importers might be confronted by OPEC countries with extraneous or detrimental terms on supply or on pricing, the importing countries should agree among themselves on a common policy, backed up by an allocation scheme-as we had earlier suggested as the appropriate response to the problems of 1979.1 Interestingly enough, Saudi Oil Minister Zaki Yamani recently suggested that the developed and developing countries should jointly adopt a scheme for the equitable distribution of world energy consumption.

Under such a scheme, all the quantities available on regular terms should be shared equitably among the various countries. It would at least reduce the fears of some countries or companies of being left out of the supply stream unless they were prepared to make special deals on basically unreasonable terms-which, when once accepted, might set the pattern for all later OPEC transactions.

However, it is clear that as a result of recent developments affecting the international oil trade, it has now become much more difficult for importing countries and their oil companies to participate in an international oil allocation program. Any allocation scheme would require some redistribution of the flow of world oil; it is predicated on a substantial degree of flexibility in the world oil supply system that had previously been assured by the dominant role of the international oil companies in controlling and directing most of the movements of oil in world trade. As mentioned earlier, this role has now been greatly reduced.

Instead, restrictions on destinations in many recent OPEC export contracts and the proliferation of direct oil supply deals between the governments of importing countries and OPEC national oil companies might deprive the importers of the necessary flexibility for the diversions of oil shipments. Moreover, the importers might well fear that if they arrange any such diversion, the producing country might cancel their oil supply arrangements. And in those cases where the consuming country has obtained oil supplies only by granting the OPEC country special political or economic advantages, it would, in any case, most likely be reluctant to make such oil available for reallocation to other countries.

There is thus a clear and present danger that recent developments in the structure of world oil trade may have undermined the basis for the emergency reallocation system of the IEA and for a self-defense program of the importing countries as suggested here.

This is a matter for urgent consideration by the governments of the importing countries. They are now confronted with a challenge to their ability to try to cope as a group with major oil supply shortages or with a continued deterioration of the terms under which OPEC oil is made available to them.

The importing countries might well be unable to agree on a joint policy. But if they should fail to take a common stand on protecting their freedom to reallocate purchased oil among themselves, they would in fact endanger their capacity for an effective self-defense against a loss of vital oil supplies and hence seriously jeopardize their future economic, political and strategic viability.

V

We have discussed until now mainly the supply, financial and structural threats that are confronting world oil operations. The year 1979 also brought into the open the geopolitical and internal revolutionary dangers threatening oil-producing countries. The collapse of the Shah's regime and Soviet aggression in Afghanistan illustrate the vulnerability of practically every one of the producing countries. Moreover, the Iranian revolution has brought to power an extreme orthodox Muslim movement with grave anti-Western and xenophobic policies that might, if unchecked, spread far into the whole Muslim world.

All of this turmoil is accompanied by intraregional conflicts among the various countries, with continuously shifting alliances and hostilities. There are also the on-and-off relations between several of them and the Soviet Union, ranging from treaties of friendship and massive supplies of Soviet arms to complete elimination of Soviet influence.

There is also the perennial Arab-Israeli conflict, apparently eased by the Israeli-Egyptian peace treaty, but now ominously threatened by the possible failure of the Palestinian autonomy discussions. While a resolution of these issues will not solve the problem of oil relations between the importing countries and the Middle East, the lack of a solution-or even of visible progress-might at any time lead to a conflict which could jeopardize directly or indirectly the uninterrupted flow of oil, or its terms of trade. Needless to say, so long as this problem remains a festering sore the stability of the Sadat regime and of the peace treaty with Israel might also themselves be at stake.

Finally, we face the problem of the internal stability of most of the Middle East regimes. There is very little doubt about the antiquated nature of many of them, and the inadequacy of the existing governmental structures to cope with modern economic problems and cultural stresses to which the oil-producing countries and sheikdoms are now inevitably exposed. Rapid modernization backed by Western governments-in part, at least, because it helps to solve the petrodollar recycling problem-and supported by Western industry through the establishment of huge and sometimes excessive industrial and infrastructure projects is bound to have an explosive effect on Middle East societies.2

Nobody can predict when and how the governmental, social and cultural systems in the various countries will change so that they can cope effectively with the problems that confront them; but change they will, and, more likely than not, by convulsions or revolutions rather than through a process of gradual evolution. In the meantime, these countries remain exposed to the often destructive forces of rapid economic development; of foreign education; of huge unearned wealth coupled with immense corruption that enriches a small group of rulers, their relatives and hangers-on; of a massive influx of foreign labor which will do much of the work and may well become a restless and dissatisfied underclass. And waiting at the gates are, on the one hand, the forces of Muslim orthodoxy as manifested already in Iran and in the attack on the Mosque in Mecca; and on the other hand, the subversive forces of Marxism as they attempt to spread their philosophy throughout the area through the Soviet footholds in Afghanistan, Aden and the Horn of Africa.

There are, on all sides, many parties who benefit from the maintenance of the present situation. It is difficult to prepare an objective analysis of this problem, and even more so to have it accepted or even considered by the policymakers of the oil-producing and importing countries-as the Iranian debacle so tragically and vividly demonstrated.

Minor or cosmetic reforms as they are now being planned in Iraq, Saudi Arabia, Kuwait and North Yemen are unlikely to stem this tide of internal and external instability and corrosion. Without going into details, the pervasive strength of all these forces is illustrated by the fact that 13 of the present Arab heads of state, or more than half of them, have reached power by forcibly removing their predecessors in one way or another; and in the past 15 years Arabs have fought Arabs in 12 fierce wars. This is the area on which, for better or for worse, we depend for stable oil supplies.

VI

Following the Soviet invasion of Afghanistan, President Carter announced that an attempt by any outside force to gain control of the Persian Gulf region would be regarded as an assault on the vital interests of the United States, and repelled by the use of any means necessary, including military force. This has now become the so-called Carter Doctrine.

It would appear that it was absolutely necessary to state clearly our overwhelming interest in Persian Gulf oil, on which we depend for over 30 percent of our oil imports, Western Europe for over 60 percent, and Japan for over 70 percent-and will continue to do so for many years to come. To have remained silent would certainly have been held against us by the producing countries and our Western allies-even though neither our allies nor the Persian Gulf countries have really given us their unqualified and open support once we spoke out.

But of course the Soviet threat to the area is of much longer standing: in Afghanistan the communist radicals seized power in April 1978; in the Arabian Peninsula the Soviets made earlier arrangements with communist South Yemen; and in the Horn of Africa the Soviets some time ago cooperated first with Somalia and then switched their support to Ethiopia.

To give some credibility to the Carter Doctrine, we have moved a substantial number of ships from the Sixth and Seventh Fleets into the area, denuding greatly our forces in the Mediterranean and in the Pacific. We are building up a Rapid Deployment Force and will provide in due course supporting services in terms of ships and airplanes through new supply stations in Kenya, Somalia and Oman-in addition to enlarging the base on Diego Garcia in the Indian Ocean.

With the countries in the area that are directly affected-such as Saudi Arabia, Kuwait, Iraq and Iran-our military relationship remains, however, somewhat tenuous and ambiguous. As a matter of fact, their official attitude toward the Soviet Union and the United States is more that of "a plague on both your houses." It is reflected in the Iraqi proposal for a charter for Arab neutrality in an East-West conflict, which has received support from many Arab countries.

There is also the Saudi opposition to the use of their oil production for increasing our woefully inadequate strategic stock-pile, and the somewhat ambiguous statement by Crown Prince Fahd that if U.S. forces should ever invade Saudi Arabia to prevent an interruption of oil supplies, the most that can be done is to blow up the oilfields.

Furthermore, there are serious doubts as to how safely we can depend on those countries where we intend to establish supply stations, such as Somalia with its hostile attitude toward Ethiopia and Kenya, and Oman where everything hinges on the policy of the ruler, who has already played a very lonely game because of his support for the Camp David agreements. We know how these rulers come and go, or may change their minds. The disappointing experience with Pakistan when the Carter Administration tried to establish an effective cooperative relationship in early 1980 is indicative of the kind of problems U.S. efforts are facing nearly everywhere else.

Moreover, with the intraregional conflicts which have been rampant, and above all with the grave internal political instabilities of almost every country in the area, a political upheaval, or a foreign or locally inspired attack on regimes or oil facilities could occur at any time, even without Soviet overt or covert interference. In most instances, we will probably never know whether or not there was any Soviet direct or indirect involvement.

In actual practice, the Carter Doctrine may thus more likely than not involve us in an attempt to protect the status quo against internal upheavals or intraregional attacks. This would be a most difficult and probably impossible assignment for U.S. military forces.

Accordingly, the basis of cooperation with many of these countries, with their frequently wavering loyalties and alliances, and their often dubious or unclear motivations, may well prove to rest on feet of clay. In addition, our ability to project sufficient power into the area over distances of 6,000 miles or more against a nearby land-based superpower is limited. In any case, even if all should go well, it will take several years before the military buildup of our forces and the adequate preparation of new supply stations can be completed.

The one thing that seems to be certain is that if fighting in the Persian Gulf should erupt, the first targets that will be destroyed, either by foreign or local forces, are the vital oil facilities. Some 60 percent of Persian Gulf exports pass through three ports, with eight critical pump sites controlling the flow of oil. While the United States itself might be able to handle a sustained interruption in Gulf oil supplies through drastic belt tightening, this is emphatically not the case for Western Europe or Japan, and the very possibility of such an event is one of the major factors inhibiting the support of these nations for U.S. policy.

In short, it would appear that the Carter Doctrine, if it were ever to be tested, would of necessity mean that the United States would react against Soviet moves to control the Persian Gulf by military or other actions at times and places of its own choosing, but not necessarily in the Persian Gulf itself. The immediate importance of the Doctrine rests perhaps mainly in the assurance to the countries in the area that the United States is actively concerned about their fate, if the Soviets should ever attack them. Its real value is based on the hope that the Doctrine will be accepted as credible and prove to be a deterrent to the Soviet Union-and will thus never be tested.

But the Doctrine creates many more problems than those mentioned up to now. Not only are the Persian Gulf countries trying to keep any U.S. military effort at some distance, but it is also not at all certain how much support, if any, many of our NATO allies and Japan are prepared to give us-even though the loss of Persian Gulf oil would hit them much harder than us. Instead, some of them, especially the French, seem to prefer to work out for themselves and perhaps for Europe a new special political and economic relationship with the Persian Gulf oil producers. They try to obtain oil supply assurances on economic terms acceptable to them by agreeing to political and other conditions-such as on the Palestinian problem and on military and nuclear supplies-that would appeal to the producing countries.

At the same time they hope that the policy of détente can be maintained, and in due course include some understanding between Western countries and the U.S.S.R. on some kind of accommodation concerning the Persian Gulf area-even though the U.S.S.R., which is and probably will remain much less dependent on foreign oil than the Western countries, might well choose to have it all its own way.

In the light of all these factors, the effectiveness of the Carter Doctrine as a deterrent to the Soviet Union is at best uncertain. The people in the area already tend to look at it partly as a selfish attempt of the United States to protect its oil supplies, and partly as a means to keep conservative governments in power against internal or external regional opposition. And our allies, as mentioned, seem to be tempted to try to go their own way. In terms of achieving U.S. policy objectives, the Carter Doctrine might in the end prove to be as ineffective as was the Nixon Doctrine policy of the 1970s, which sought to establish regional security through a local national surrogate government such as Iran.

VII

The medium-term prospects for the security and availability of oil and for the economic and political stability and strategic security of the Western world are indeed disturbing. If we now consider the longer term outlook, the picture looks equally forbidding. Not only are all the economic and political problems to which we have already referred likely to remain with us; but in addition, even by the year 2000, the massive challenge of moving from a mostly oil-based energy economy worldwide to one that can largely draw on other more amply available energy resources will probably still remain largely unresolved.

A comprehensive and authoritative projection of the overall energy picture up to the year 2000 that is currently available is the Exxon publication, World Energy Outlook, released in early 1980. This study postulates a very high rate of expansion of energy production from non-oil sources during this period. Specifically, it forecasts a nearly 120 percent increase over 1980 in the non-communist world's use of coal; a more than quintupling of nuclear power; a more than doubling of hydro-power including solar, geothermal, etc.; and a buildup of synthetic fuel production from coal, tar sands, and oil shale, from virtually zero to seven million barrels per day.

In addition, the Exxon projections reflect a highly successful effort in improving the efficiency of energy use. Between 1980 and 2000, the average annual growth of non-communist world Gross National Product, adjusted for inflation, is estimated at about 3.5 percent, while energy consumption is projected to grow at only 2.5 percent per annum. This reflects a substantially expanded conservation effort from the past. For example, according to Exxon statistics, between 1965 and 1973 energy use in the non-communist world grew more rapidly (5.5 percent per annum) than economic output (5.0 percent per annum).3

Even on such assumptions, however, the Exxon study concludes that there would remain in the year 2000 a demand for oil of 60 million barrels daily, which would be 15 percent above the 1978 demand level. Oil and gas combined would by the year 2000 contribute 86 million barrels daily oil equivalent, or 52 percent of total non-communist world energy demand as compared with 72 percent in 1978. Exxon also assumed that:

The combined net oil exports from the Soviet Union, Eastern Europe, and the People's Republic of China to the rest of the world would remain roughly constant during the period, at 1.0 million barrels daily, with declines in availability from the Soviet Union offset by increasing amounts from China;

total non-communist world oil production outside OPEC would increase by some 7 million barrels per day to 26 million barrels daily by the year 2000; and

production (including natural gas liquids) still required from OPEC countries would, at 33 million barrels daily, be 10 percent above its 1978 level and amount to 55 percent of total non-communist world oil supply in the year 2000.

The average annual addition to oil reserves through new discoveries in the non-communist world, between 1980 and 2000, was projected by Exxon to range between 9 and 15 billion barrels. To assess the reserve-to-production ratio for the year 2000, let us use the figure of 12 billion barrels, the midpoint of this range. Accordingly, the reserve-to-production ratio would decline from 31 years in 1980 to roughly 20 years by the year 2000. For most of the producing countries, except for a few of the oil-rich countries, the reserve-to-production ratio by the year 2000 would be 10 years or less.

In the meantime, with a continued decline in the reserve-to-production ratio during the 20-year period, it is almost inevitable that real prices for oil would take off. The ensuing financial and economic problems could far exceed those which would be incurred between 1980 and 1985 and would-within the framework of our society and institutions-appear to be beyond our current capacity to cope. Moreover, many of the producing countries would certainly, for reasons of economic or political policy or because of physical limits set by productive capacity, reduce their production when their reserve-to-production ratio declines below a certain minimum. There is thus a "self-destruct" element in the relationship between the projected size of oil production and the economic and political consequences that it could entail.

VIII

The question thus arises: If indeed the problems can be kept manageable, what must the importing countries do to assure their future political, economic and strategic viability?

From all that has been said so far, it would appear that the oil importers would probably need 30 years or more to create an energy economy based overwhelmingly on sources other than oil-and even this goal might not be achievable if we wished to sustain a viable rate of economic progress. During the 30 years-plus when we must surely still very much rely on oil, a large part of that oil must be obtained from the oil-rich countries of the Persian Gulf. Even in the unlikely case that within the next 10 to 15 years massive new discoveries should be made, comparable to those of the Middle East, it would take perhaps some 10 additional years before they could be fully developed.

It is thus imperative-during the period when the importing countries must procure each year more than 25 million barrels a day from OPEC producers and some additional substantial quantities from non-OPEC sources such as Mexico-that the real price of oil be kept at a manageable level. This may well mean that for some time to come prices should not increase at a much higher rate than that of inflation. The underlying concept would have to be that oil must be conceived in terms of a "common heritage of mankind" that must serve both the welfare of the producing countries and that of the importing countries.

That might well be considered to be an unrealistic utopian fantasy, especially as it would have to be based on an accommodation between oil producers and oil importers where both parties take full account of each other's vital interests. Above all it presupposes that the United States, the Soviet Union and possibly China agree on common principles that would apply to their policies affecting the area, and thus would be willing to abstain from any actions that might interfere with the maintenance or establishment of peace and tranquillity in the Middle East.

Specifically, it would require the conclusion of effective arrangements between oil-importing and producing countries on the size of needed oil exports, on a sustainable level of prices, on the planning and implementation of development programs for producing countries and on many other areas of concern to all the parties involved.

It would also imply that the threat of instability within producing countries and that of intraregional quarrels in the Middle East would be contained and neutralized. Within the Middle East, the Arab-Israeli conflict must be concluded, which in fact means that the autonomy issue and the Palestinian problem must be equitably resolved. But there are many other potentially explosive quarrels affecting the region-such as those centering around Lebanon; or the relationship between Iran, Iraq and other Arab countries; that of South versus North Yemen; the isolation of Egypt within the Arab world; the problems that are posed by the Libyan attitude towards its neighbors; and so on.

Within the various Middle East countries, the modernization of their political systems and of their economies must proceed without upsetting their traditional values. The new Orthodox Muslim movement, as it might be spreading from Iran, might otherwise engulf all those forces in the area that are seeking to achieve reasonable political and economic progress.

If all this were possible, we could probably solve the major problems that are related to the world's long-term dependence on Middle East oil. However, this kind of scenario does not reflect the world as it is now and is likely to be in the future; and we have not much reason to hope that the various producing countries, the importing countries, and the superpowers will ever agree on such a rational course of conduct- especially as the immediate dependence of the Soviet Union on Middle East oil is less than that of the United States and of most other Western nations.

Instead, we will probably be confronted by a series of major oil crises which might take any or all of several forms: fighting for control over oil resources among importing countries or between the superpowers; an economic-financial crisis in importing countries; regional conflicts affecting the oil-producing area; or internal revolutions or other upheavals in the Middle East. At best, it would appear that a series of future emergencies centering around oil will set back world progress for many, many years. And the world, as we know it now, will probably not be able to maintain its cohesion, nor be able to provide for the continued economic progress of its people against the onslaught of future oil shocks-with all that this might imply for the political stability of the West, its free institutions, and its internal and external security.

1 See Walter J. Levy, "A Warning to the Oil-Importing Nations," Fortune, May 21, 1979, p. 48.

2 See also Walter J. Levy, "The Years That the Locust Hath Eaten: Oil Policy and OPEC Development Prospects," Foreign Affairs, Winter 1978/79.

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